Founded in 1994 and based in Petaluma, California, Intelisys operates in the United States and has approximately 120 employees, more than 130 supplier partners, and over 2,400 sales partners. Intelisys positions itself as a technology services distributor of business telecommunications and cloud services. The company had 2015 gross commissions of $120 million, distributing services for telecom carriers, cable companies, cloud services providers and technology partners.

In a prepared statement, the two companies said:

“Intelisys provides agents and value-added resellers (VARs) with an extensive portfolio of services, support and enablement tools to sell cloud and connectivity services. The acquisition accelerates Intelisys’ ability to extend this successful model to the ScanSource VAR community. ScanSource VARs will gain access to Intelisys’ robust portfolio of carefully selected, highest-quality connectivity and cloud services offerings, as well as the tools and platforms that help partners build recurring revenue streams.”

The buyout allows ScanSource to broaden “its capabilities by entering the telecom and cloud services market with the acquisition of Intelisys” — especially in the U.S. SMB market, which spends $150 billion on telecom services. However, only 10 percent of that is via the indirect channel, presenting a big opportunity for ScanSource and Intelisys, the companies assert.

In a prepared statement, Comcast Business applauded the deal.

“This next transformation of the channel is clear evidence of evolving end-user needs, as we begin to see the bundling of hardware and software with network and cloud,” said Craig Schlagbaum, VP of indirect channels for Comcast Business. “As our largest ‘Master Agent’ partner, Intelisys has been instrumental in helping Comcast Business build a scalable channel. With the combined strength of Intelisys and ScanSource, we expect outstanding customer and partner opportunities to result from bridging these two channels.”

ScanSource Acquires Intelisys: Buyout Terms

Under terms of the agreement, the all-cash transaction includes an initial purchase price of approximately $83.6 million, plus earn-out payments based on earnings before interest expense, taxes, depreciation and amortization (EBITDA) over the next four years, the two companies said. Intelisys has delivered double-digit growth of net revenues and EBITDA, which is projected to continue during the four-year earn-out period, the companies added.

For the first full year after closing, Intelisys’ net revenues, which reflect gross commissions less payments to sub-agents, are estimated to total over $34 million with a 45% to 50% estimated EBITDA margin.

In other words, Intelisys’ annual EBITDA is about $17 million, ChannelE2E estimates. The deal’s valuation is therefore at least 4.9 times EBITDA (83.6 divided by 17 = 4.9). However, it’s likely that the finalized valuation will be a bit above that since Intelisys has earn-out targets to sweeten the deal.

Valuation Update/Correction, 9:50 a.m. ET, Aug 8: The valuation is much higher than the figure above because the potential earn out payments are estimated to be in the range of $100 million to $150 million, depending on the performance of the business, according to an SEC filing that was just viewed by ChannelE2E. So, our revised math on valuation:

$83.6 million up front.

Plus potential $150 million earn-out.

That’s $233.6 million total potential deal size.

Divided by the $17 million EBITDA estimate = valuation of 13.7 times EBITDA.

Note: That valuation estimate will come down quite a bit because surely Intelisys’s EBITDA is expected to rise quite a bit over the four-year earnout period. Let’s say EBITDA rises 20 percent annually (compounding) from now through 2020. That takes Intelisys annual EBITDA up to about $35 million.

Now, take the potential $233.6 million top-line deal payment and divide by the potential $35 million bottom line EBITDA and you get a 6.6 EBITDA multiple in 2020.

Average out today’s 13.7 EBITDA multiple and the 2020 EBITDA multiple of 6.6, and you’re likely somewhere around a 10X EBITDA multiple when all is said and done.

The acquisition is expected to close in the quarter ending Sept. 30, 2016, subject to regulatory approval. Prior to the close, ScanSource and Intelisys will continue to operate as independent companies.

Comments

August 11, 2016 at 8:45 am

Nice work boiling down a multiple, but there are a few things missing. First year, and subsequent year, operational synergies and consolidation must be factored into the equations, as the buyer is certainly not waiting 13.7 years (nor even 6.6 years per your growth estimates) to break even on this deal. These costs savings are most often a substantial component of purchase price modeling and ignored in this article. Since it is most common to see buy-side break even projections at 60 months or less, with the sweet spot between 36 and 48 months, your example doesn’t hold water without including consolidation estimates.

Thus, while looking at “the multiple” from the Seller’s perspective would seem relevant, using their historic estimated EBITDA of $17 million as the baseline is quite misleading. The grease that made this deal work is likely a forward “Adjusted EBITDA” of at least double that, or more. That is generally why calculating a multiple of trailing historic EBITDA is folly, as it is not really the guidepost and it is most certainly not why this deal happened. Among all the other good reasons for each side to want to do this deal, the buyer likely uncovered the near term value of the opportunity and felt confident enough in their numbers over time as well, that their IRR (Internal Rate of Return) would be at or near at least 20% so the deal made sense fiscally. When factoring forward adjustments to EBITDA and add backs, the buyer’s multiple is more likely to be at 5.25x on this transaction. Which will calculate lower if the combined companies do well and beat estimates.

In summary, while the seller may indeed see what looks to them to be “13.7 times trailing EBITDA” by the end of the earn-out payment period, they will have accomplished that by realizing the ”projected Adjusted EBITDA” in the Buyers forecast. Dividing the total purchase price paid by the adjusted EBITDA is the actual “multiple” that should be used in discussion and how to properly set expectations on both sides of the table.